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Increased Welfare Benefits Really Do Reduce The Employment Rate

There’s been something of a furore about whether extended unemployment benefits increased the unemployment rate or not. On the one side those saying that of course the extension from the usual 26 weeks to 99 meant that some people stayed unemployed longer than they would have done without the extension. The fight back against this idea is largely driven by those insisting that it didn’t make any difference at all as there just weren’t any jobs to take even if there were no extension. There’s even a small group insisting that the extension actually lowered the unemployment rate as the macroeconomic addition to demand of people having at least some income led to there being more jobs in the economy as a whole.

It’s worth noting that there’s quite a lot of politics behind all three positions. Goodly numbers are arguing entirely in good faith, others are adopting whatever position seems best to benefit their own views. There are those arguing against the extension who simply don’t like the idea of paying any sort of welfare, those arguing in favour of the extension just because they think there should be more welfare in general and so on. And there’s the very lonely but correct group pointing out that whether or not the unemployment rate was higher as a result of the extension isn’t actually the point at all. We’d like to know, sure, but perhaps the alleviation of human misery was worth doing it anyway? (Largely, of course, my own opinion.)

It has all become really rather fractious: so why not have a look at the employment/unemployment effects of a different program, to see if a little light can be thrown on matters? Which is what this paper does:

We explore trends over time in the labor force participation of veterans and non-veterans and investigate whether these patterns are consistent with a rising role for the Veterans’ Affairs Disability Compensation (DC) program, which pays benefits to veterans with service-connected disabilities and has grown rapidly since 2000. Using 35 years of March CPS data, we find that veterans’ labor force participation declined over time in a way that coincides closely with DC growth and that veterans have become more sensitive to economic shocks. Our findings suggest that DC program growth has contributed to recent declines in veterans’ labor force participation.

There’s been a series of policy changes in that disability program. For example, certain diseases potentially caused by exposure to Agent Orange have been added to qualifying problems. And it’s possible to track applications for disability through the age cohorts and troops (in this case, a distinction between boots on the ground in Vietnam and service at the same time) and see whether an expansion of the availability has led to a rise in the number claiming the benefit as against other troops of the same age.

The answer is, as we would all expect, yes. And that has then had an influence on the number of veterans in employment, as we would all also expect.

Thus showing, as we would all really rather expect, that if you raise welfare payments then you’re going to reduce employment among those who can claim such payments.

None of which, as above, provides a convincing case against increasing welfare payments, whether they be of disabilities picked up in military service or insurance against the simple misfortune of being unemployed. However, we do want to be mindful of such effects, to measure them and acknowledge them. For only then can we measure those undesirable effects against the desirable ones of people actually having more money and thus misery being alleviated. Or, as is usual in measuring economic policies, there’s costs and benefits to everything under the Sun and only by weighing and measuring them can we work out which trade off we wish to make. I’m in favour both of the unemployment extension and also this increase in military disabled benefits: but I do acknowledge that both also come with costs. It’s the net balance that is favourable.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the…MORE